Buying Stocks at a 10% Discount 1 Performance Investment Management Trading Trading Trading Trading Exchange Traded Funds Exchange Traded Funds Exchange Traded Funds Exchange Traded Funds (ETF’s ETF’s ETF’s ETF’s) Performance Investment Management Performance Investment Management Disclaimer Disclaimer Disclaimer Disclaimer Exchange Traded Funds, like any security, may not be appropriate for all investors. The following presentation is for educational purposes only and should not be construed as a recommendation to buy or sell. Before considering an investment in Exchange Traded Funds, you should perform your own due diligence and consult with your financial advisor. Performance Investment Management There are about 900 ETF’s presently with hundreds more in registration. Over $1 Trillion is now invested in ETF’s Performance Investment Management The First ETF The First ETF The First ETF The First ETF The granddaddy of ETF’s is the SPY or “SPDR.” Launched in 1993, the SPY ETF represents all 500 stocks in the S&P 500 Index. When you purchase or sell a SPY share, you are actually purchasing small fractions of all 500 S&P stocks. Performance Investment Management ETF’s ETF’s ETF’s ETF’s Resemble Mutual Funds Resemble Mutual Funds Resemble Mutual Funds Resemble Mutual Funds ETF’s are somewhat like mutual funds. An entire basket of securities are traded as a whole. However, there are important differences which will be discussed shortly.
Exchange Traded Funds, like any security, may not be appropriate for all investors.
The following presentation is for educational purposes only and should not be construed as a recommendation to buy or sell.
Before considering an investment in Exchange Traded Funds, you should perform your own due diligence and consult with your financial advisor.
Performance Investment Management
There are about 900 ETF’s presentlywith hundreds more in registration.
Over $1 Trillion is now invested in ETF’s
Performance Investment Management
The First ETFThe First ETFThe First ETFThe First ETF
The granddaddy of ETF’s is the SPY or “SPDR.” Launched in 1993, the SPY ETF represents all 500 stocks in the S&P 500 Index. When you purchase or sell a SPY share, you are actually purchasing small fractions of all 500 S&P stocks.
ETF’s can be purchased in quantities as small as one share. However, the transaction costs are the same as buying a share of stock. So, you must take into the trading commissions on small lots of shares.
Like Mutual Funds, ETF’s can provide a large diversification for your portfolio with a very small investment.
Performance Investment Management
ETF TaxesETF TaxesETF TaxesETF Taxes
ETF Dividends are taxed as qualified dividends, the same as stocks.
Capital gains are short term or long term depending on your holding period
Performance Investment Management
ETF’s vs ETF’s vs ETF’s vs ETF’s vs Mutual FundsMutual FundsMutual FundsMutual Funds
Although there are similarities between ETF’s and Mutual Funds there are also some significant differences:
An ETF can be traded at any time during the trading day. Most Mutual Funds can only bought or sold on the closing price that day.
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
Second, ETF’s can be purchased on margin. This means that you can buy twice the amount of ETF’s as Mutual Funds with your broker lending you the money at the going interest rate for the additional shares.
Mutual Funds cannot always be bought on margin.
Buying Stocks at a 10% Discount
3
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
Many ETF’s offer call and put options. For example, you can collect option premium by selling calls against your ETF position. Or, you can buy a put option to protect your ETF position from a decline in value.
Options are not offered for Mutual Funds.
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
You can sell an ETF short. That is, you can sell the shares now, expecting to buy them back at a lower price in the future. So, if you are bearish on a particular basket of securities, you can make money when the price falls.
You cannot short mutual funds.
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
Mutual Funds pass capital gains through to their shareholders of record and is taxed in that same year.
ETF’s do not generally pass through capital gains because the basket of securities in a passive ETF is not traded. There are no unexpected gains.
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
Finally, there are generally less management fees associated with ETFs than with Mutual Funds - even no load funds.
So, more of your money is working for you rather than the fund management company.
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
The vast majority of Mutual Funds are “managed” to try to improve their return over the Market.
Even though most fail to do so, active management has its cost. Mutual Funds also have built in marketing costs that are passed on to the investor.
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
ETFs are generally “passive.” That means that once the basket of securities are set up, there is rarely a change in the makeup of the group going forward.
So, an ETF doesn’t need the services of an expensive fund manager.
Buying Stocks at a 10% Discount
4
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
One advantage of Mutual Funds is that there are still 10 times more than ETF’s so you might find one offering a strategy that is not yet available through an ETF.
Performance Investment Management
ETFs vsETFs vsETFs vsETFs vs Mutual FundsMutual FundsMutual FundsMutual Funds
Another potential advantage is that some Mutual Funds allow very low minimum purchases like $100. If you bought one share of SPDR for $109 you would be charged the minimum brokerage commission - severely diminishing your potential profit.
Performance Investment Management
ETF ChoicesETF ChoicesETF ChoicesETF Choices
The most popular ETFs are those that represent the major indices like the Dow (DIA), S&P 500 (SPY), Russell 2000 (IWM) and the Nasdaq 100 (QQQQ).
The high volume of trades for these ETF’s make for a very liquid market, often offering $0.01 - $0.02 bid/asked spreads. However, low volume ETF’s can have wide spreads so be careful using a Market Order with these.
Performance Investment Management
Sector Sector Sector Sector ETF’sETF’sETF’sETF’s
If you are interested in investing in a particular economic sector of the Market with low fees & diversification over a number of securities, ETF’soffer you that opportunity.
There are ETF’s available on a variety of economic sectors. This allows you to choose the part of the Market you think will perform the best in the next part of the economic cycle.
Purchasing the ETF for just that one sector will achieve your goal.
Performance Investment Management
SectorSectorSectorSector ETF’sETF’sETF’sETF’s
For example, if you are bullish or bearish on just the financial sector, you can buy or short the XLF. This ETF is composed just of financial stocks like JP Morgan, Bank of America and Wells Fargo.
You can target your investment by sector this way.
Buying Stocks at a 10% Discount
5
Performance Investment Management
Sector Sector Sector Sector ETF’sETF’sETF’sETF’s
Many other sectors ETFs are available. They include: semiconductors, home building, biotech, materials, utilities, industrials, health care, consumer discretionary and consumer staples,technology, retail, clean energy, agriculture, defense, insurance, mining, energy, & others.
Performance Investment Management
ETF by Capitalization SizeETF by Capitalization SizeETF by Capitalization SizeETF by Capitalization Size
ETFs also allow you to pick your investment in groups of stocks that are small, medium or large in size.
If you believe it is the time of the large stock, you can purchase a large stock ETF like the SPY or, if small stocks are of interest, look at the IWM.
Performance Investment Management
Growth Growth Growth Growth vs vs vs vs Value Value Value Value ETF’sETF’sETF’sETF’s
Generally, we think of value stocks as ones that are not expected to grow earning quickly and often pay high dividends. One the other hand, growth stocks are expected to grow earnings rapidly and often pay little or no dividends.
Performance Investment Management
Growth Growth Growth Growth vs vs vs vs Value Value Value Value ETF’sETF’sETF’sETF’s
Growth and Value stocks go in and out of favor with the economic cycle. With ETF’s you can easily move from Value to Growth and vice versa depending on your outlook.
ETF’s allow you to invest around the world by country or by region. There are ETFs for individual countries like Japan, Australia, China, Mexico and others. There are also regional ETF’sfor the Pacific Rim, Latin America and Europe.
Performance Investment Management
Metal Metal Metal Metal ETF’sETF’sETF’sETF’s
With ETFs you can buy or sell shares that represent real gold and silver bullion. No storage fees, commissions or insurance necessary!
The GLD and SLV allow you to take a bull or bearish stand on these two precious metals. There is also a ETF for platinum, the PPLT.
Buying Stocks at a 10% Discount
6
Performance Investment Management
Metal Metal Metal Metal ETF’sETF’sETF’sETF’s
Because there are options for the GLD, you can sell call options against bullion or coins you may own to bring in additional income while you wait for the appreciation of the metal.
Selling out of the money (OTM) calls at $100 per oz above the current price of the metal leaves room for capital appreciation while you collect income.
If you have a postion on interest rates, there are ETFs which represents a collection of bonds both corporate and government; short and long term.
By using one of these ETF’s, you could benefit from a change in interest rates both US & Internationally.
Performance Investment Management
Energy & Commodities Energy & Commodities Energy & Commodities Energy & Commodities ETF’sETF’sETF’sETF’s
Like to invest in commodities but don’t have a clue how to use commodity futures? Not a problem with a commodity ETF. Buying the GSG, you can own energy, metals, livestock and agricultural commodities. Or, the DBA if you are looking for a pure agricultural play.
Performance Investment Management
Energy & Commodities Energy & Commodities Energy & Commodities Energy & Commodities ETF’sETF’sETF’sETF’s
There is also a specific ETF that trades Texas light sweet crude oil. The ticker symbol is USO. The ETF for Natural Gas is the UNG.
If you prefer trading energy companies there is the XLE. Oil service companies are represented in the OIH.
Inverse ETF’s are what their name implies. When the basket of securities goes up, the ETF value goes down and vice versa. It allows you to invest against the basket without having to short the “long” ETF.
Inverse ETF’s allow you to take a bearish stand by going long. This is important if your investment account is a retirement fund like an IRA, ROTH, or 401k which prevents shorting.
New ETF’s offer you more bang for your investment buck. For example, the SSO moves at twice the rate of the standard S&P 500 SPY. The BGU moves at three times the SPY. You’ll often see in the ETF title the terms “2X” or “3X” to signify these leveraged ETF’s. “Ultra” usually means 2X.
Again, leveraged ETF’s can be used in retirement accounts that cannot increase their ownership of shares by using margin. You cannot borrow in a retirement account. However, by using leveraged ETF’s, you can multiply your return if you correctly predict direction.
For example, the S&P 500 SPY ETF is up 0.5% YTD. If you bought the SSO which is 2X to the SPY, you would expect a return of +1.0% The actual year to date return? minus 1.0%!
Buying the 2X inverse, the SDS, would have lost you 8%.
Buying Stocks at a 10% Discount
8
Performance Investment Management
ETF SummaryETF SummaryETF SummaryETF Summary
As you can see, ETFs offer an enormous amount of flexibility when it comes to investing in baskets of securities at low cost.
ETFs are traded just like stocks and can be bought on margin. They can be bought or sold short and many offer put and call options.
Performance Investment Management
ETF SummaryETF SummaryETF SummaryETF Summary
There are inverse and leveraged ETF’s which offer new investment options to your retirement accounts.
Whatever your outlook on US stocks, foreign stocks, currencies, interest rates, metals, real estate or sectors, there is probably an ETF that would be a good choice for you.
